FPX and CSD are ETFs based on IPO and spin-off strategies.
They are similar in inception dates, AUM and liquidity, making a comparison easy.
Both ETFs outperform the benchmark, but timing techniques are recommended because of a higher volatility.
In a previous article I have written about hedge-fund based ETFs. This one looks into two ETFs launched in 2006: the First Trust IPOX Index ETF (NYSEARCA:FPX) and the Guggenheim Spin-Off ETF (NYSEARCA:CSD). The business models rely on the idea that new stocks have a tendency to outperform the market. If you want more information about this claim, you can look for academic publications with the keywords "IPO abnormal return" and "spin-off abnormal return" in the Social Science Research Network library.
Hedge Funds typically charge a 2% management fee and a 20% performance fee. Investors are submitted to various constraints, among them a minimum capital and specific redemption dates. FPX and CSD are charging less than 1% in net annual expense ratio, and shares can be traded by any investor at any time when the stock market is open. It makes them attractive for people who are not eligible as hedge fund customers. Each of them is based on a different deterministic rule-based strategy defined as an underlying index. More information about the methodologies can be found here (for FPX) and here (for CSD).
The first table gives a summary of their profiles:
Avg Daily Volume
100 (max. 9.1%)
33 (max. 5.4%)
Both ETFs are very similar in expense ratio and daily volume. FPX is more diversified with more total holdings, but more concentrated in its top holdings. The current top three holdings of FPX are AbbVie (NYSE:ABBV), Facebook (NASDAQ:FB) and General Motors (NYSE:GM). They represent together 23.8% of the net asset value. The top three holdings of CSD are WhiteWave Foods (WWAV), Starz (STRZA) and AMC Networks (AMCX), representing 15.4% of the NAV.
The next chart compares FPX and CSD between 12/15/2006 and 4/4/2014. SPY is given as a benchmark.
Both ETFs have outperformed the benchmark. FPX looks better in terms of drawdown and return. The next table gives more details about the performance on this period. Statistics are calculated using OHLC price data. It means that the maximum drawdown is an intraday value, whereas the chart above is drawn with the weekly closing prices. It is an important point when past data are used to size a stop-loss.
Dividends are reinvested. There may be different interpretations of Sharpe's formula and of how calculating the volatility (standard deviation), which may give different values. What is important is that the three ETFs are evaluated in the same way.
FPX and CSD provide a higher return at the price of a higher volatility. Both have a risk-adjusted performance (Sharpe ratio) higher than SPY since their inception date. FPX had the best total return and Sharpe ratio on this past period, which is not a guarantee for the future. Despite being more concentrated in its top holdings, FPX was also safer in terms of drawdown and volatility. Investors wanting to invest in both products must know that they have some common holdings and should check them. To limit the risk, investors may want to associate the embedded strategies of these ETFs with portfolio protection tactics like market timing or timed hedging (click here to know how).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.